Investors are becoming more conscious about companies they are supporting and until recently there has not been a uniform standard that measures how sustainable a company is. In comes ESG. ESG is a set of standards of a company’s operations and how it performs as a steward of nature. Before ESG was created, there used to be some information about sustainability that companies would share but these facts would usually be cherry picked to make the company look better. In response, ESG was made.
Instead of excluding specific companies or industries, ESG is meant to measure a company’s operations and give investors a number than can correlate to the sustainability of a company. In the ESG world the lower the score, the more sustainable and environmentally friendly the company is.
ESG is broken into three separate metrics: Environmental, Social, Governance. The environmental metric uses factors such as contribution to climate change, biodiversity and use of raw materials, toxic emissions waste, packaging material and waste, along with use in green building and opportunities in renewable energy. If a company has a history of disposing harmful chemicals into the ocean, they will score high in this metric.
The social metric uses employee health and safety, labor management, supply chain and labor standards, product safety privacy and data security along with financial security. If a company has a history of cyber-attack vulnerabilities, they will score high in this metric.
The governance metric uses factors such as board diversity, executive pay, accounting methods, corruption and instability, and anti-competitive practices. If a company has been proven to use illegal account methods in the past, their score would be very high in this metric.
ESG is a great way to analyze a company that you may have interest in and allows for having readily available information about how the company operates in a sustainable way. Rather than relying on tidbits from a CEO’s interview on Bloomberg, or certain facts companies share, ESG gives you an overall measure of a company’s operations as a whole ranging from employee health concerns to how the company disposes of hazardous materials.